The Committee of European Securities Regulators’ (CESR) proposals to make broker dark pools more transparent will not achieve their aim of creating a level playing field between trading venues, according to buy-side crossing network and agency brokerage Liquidnet.
CESR, which seeks to coordinate securities regulation across Europe, published its recommendations on 29 July 2010 as part of a technical advice paper submitted to the European Commission which is carrying out a review of MiFID, which should conclude Q1 2011.
Part of the recommendations included a tightening of the rules governing broker crossing systems (BCS), including greater post-trade transparency to both regulators and market participants and imposing a limit on the amount of business a BCS can execute before it is required to reclassify as an multilateral trading facility (MTF). CESR said that “A high degree of transparency is an essential part of this framework, so as to ensure a level playing field between trading venues.”
However in a written response to these recommendations, Liquidnet claims that they “maintain the uneven playing field between MTFs and BCSs with respect to various requirements, including pre-trade transparency, post-trade identification and market surveillance.”
Liquidnet argues that MTFs and BCSs should have equivalent regulatory treatment as the only real difference between the way both types of venue match orders is the level of direct participation afforded to customers. Market participants have direct control over orders when they are sent to MTFs, while orders sent to broker dark pools are typically routed as part of an algorithmic strategy.
“Rather than imposing additional requirements on BCSs, we support greater flexibility for institutional MTFs like Liquidnet to innovate to provide solutions for our customers that help reduce their market impact costs,” the firm concluded.
CESR's recommendations follow a long and ongoing debate between brokers and exchanges – primarily through the Federation of European Securities Exchange (FESE) – on the disparities between the regulation of BCSs versus exchanges and MTFs. FESE claims that BCSs operate in a similar fashion to other regulated markets and should be governed as such, while brokers counter that their dark pools are already subject to strict regulations as part of their best execution obligations to clients.